Glossary of Terms

Glossary Of Terms

A summary of the public records relating to the title to a particular piece of land. An attorney or title insurance company reviews an abstract of title to determine whether there are any title defects which must be cleared before a buyer can purchase clear, marketable, and insurable title.

A variable or flexible rate mortgage with an interest rate that adjusts periodically according to the financial index it is based upon plus a margin. To limit the borrower¹s risk, the ARM may have a payment or rate cap.

An obligation undertaken by the purchaser of property to be personally liable for payment of an existing Mortgage. In an assumption, the purchaser is substituted for the original mortgagor in the mortgage instrument and the original mortgagor is to be released from further liability in the assumption, the mortgagee’s consent is usually required.

The original mortgagor should always obtain a written release from further liability if he/she desires to be fully released under the assumption. Failure to obtain such a release renders the original mortgagor liable if the person assuming the Mortgage fails to make the monthly payments.

An “Assumption of Mortgage” is often confused with “purchasing subject to a Mortgage .”
When one purchases subject to a mortgage, the purchaser agrees to make the monthly mortgage payments on an existing mortgage, but the original mortgagor remains personally liable if the purchaser fails to make the monthly payments. Since the original mortgagor remains liable in the event of default, the mortgagee’s consent is not required to a sale subject to a mortgage.

Both “Assumption of Mortgage” and “Purchasing Subject to a Mortgage” are used to finance the sale of property. They may also be used when a mortgagor is in financial difficulty and desires to sell the property to avoid foreclosure.

A mortgage that has level monthly payments which are insufficient to amortize the loan so that a balloon, or lump sum payment is due at the end of the term. Frequently, balloon mortgages contain an opportunity to refinance when the balloon payment is due.

A proceeding in a federal court in which a debtor (who owes more than his/her assets or cash flow) is relieved from the payment of debts. This can affect the borrower’s personal liability or the mortgage debt but not the lien of a mortgage.

A preliminary agreement, secured by the payment of earnest money, between a buyer and seller as an offer to purchase Real Estate. A binder secures the right to purchase Real Estate upon agreed terms for a limited period of time. If the buyer changes his mind or is unable to purchase, the earnest money is forfeited unless the binder expressly provides that it is to be refunded.

Distances from the ends and/or sides of the lot beyond which construction may not extend. The building line may be established by a filed plat of subdivision, by restrictive covenants in deeds or leases, by building codes, or by zoning ordinances.

Where the buyer pays additional discount points in return for a below market interest rate; or the buyer or seller deposits sufficient funds with the lender to reduce the rate during the first one to three years of the loan; or pays closing costs such as the origination fee. During times of high interest rates, buy-downs may induce buyers to purchase property they may not otherwise have purchased.

A limit on how much an adjustable rate mortgages monthly payment or annual interest rate can increase. A cap is meant to protect the borrower from large increases and may be a payment cap, an interest cap, a life-of- loan cap or periodic cap. A payment cap is a limit on the monthly payment. An interest cap is a limit on the amount of the interest rate. A life-a-loan cap restricts the amount the interest rate can increase over entire term of the loan. A periodic cap limits the amount the interest rate can change each interest rate adjustment date.

A transaction in which the formalities of a Real Estate sale are concluded. The certificate of title, abstract, and deed are generally prepared for the closing by an attorney and this cost charged to the buyer. The buyer signs the mortgage, and closing costs are paid. The final closing merely confirms the original agreement reached in the agreement of sale.

Money paid to a Real Estate agent or broker by the seller as compensation for finding a buyer and completing the sale. Usually it is a percentage of the sale price–6 to 7 percent on houses, 10 percent on land.

Those portions of a building, land, and amenities of a PUD, condo or co-op that are used by all the unit owners, who share in the common expense of their operation and maintenance. Common areas usually include swimming pools, tennis courts, or other recreational facilities, as well as common corridors of buildings, parking lots, etc.

The taking of private property for public use by a government unit, against the will of the owner, but with payment of just compensation under the government’s power of eminent domain. Condemnation may also be a determination by a governmental agency that a particular building is unsafe or unfit for use.

A short-term loan financing improvements to Real Estate, such as the building of a new home. The lender advances funds to borrower as needed while construction progresses. Upon completion of the construction, the borrower must obtain permanent financing or pay the construction loan in full.

In the construction industry, a contractor is one who contracts to erect buildings or portions of them. There are also contractors for each phase of construction: heating, electrical, plumbing, air conditioning, road building, bridge and dam erection, and others.

A mortgage loan not insured by HUD or guaranteed by the Veterans’ Administration. It is subject to conditions established by the lending institution and State statutes. The mortgage rates may vary with different institutions and between States. (States have various interest limits.)

An apartment building or a group of dwellings owned by a corporation, the stockholders of which are the residents of the dwellings. It is operated for their benefit by their elected board of directors. In a cooperative, the corporation or association owns title to the Real Estate. A resident purchases stock in the corporation which entitles him to occupy a unit in the building or property owned by the cooperative. While the resident does not own his unit, he has an absolute right to occupy his unit for as long as he owns the stock.

A Mortgage loan that is not insured, guaranteed or funded by the Veterans Administration (VA), the Federal Housing Administration (FHA), or Rural Economic Community Development (RECD), (formerly Farmers Home Administration).

The ratio of the borrower’s total monthly obligations, including housing expenses and recurring debts, to monthly income. It is used to determine the borrower’s capacity to repay the Mortgage and all other debts.

A formal written instrument by which title to real property is transferred from one owner to another. The deed should contain an accurate description of the property being conveyed, should be signed and witnessed according to the laws of the State where the property is located, and should be delivered to the purchaser at closing day. There are two parties to a deed: the grantor and the grantee. (See also deed of trust, general warranty deed, quitclaim deed, and special warranty deed.)

Like a mortgage, a security instrument whereby real property is given as security for a debt. However, in a deed of trust there are three parties to the instrument: the borrower, the trustee, and the lender, (or beneficiary). In such a transaction, the borrower transfers the legal title for the property to the trustee who holds the property in trust as security for the payment of the debt to the lender or beneficiary. If the borrower pays the debt as agreed, the deed of trust becomes void. If, however, he defaults in the payment of the debt, the trustee may sell the property at a public sale, under the terms of the deed of trust. In most jurisdictions where the deed of trust is in force, the borrower is subject to having his property sold without benefit of legal proceedings. A few States have begun in recent years to treat the deed of trust like a mortgage.

A PUD in which the common property has less than a 2% influence upon the value of the premises. The 2% rule of thumb is calculated by dividing the dollar amount of amenities by the total number of units.

Failure to make mortgage payments as agreed to in a commitment based on the terms and at the designated time set forth in the mortgage or deed of trust. It is the mortgagor’s responsibility to remember the due date and send the payment prior to the due date, not after. Generally, thirty days after the due date if payment is not received, the mortgage is in default. In the event of default, the mortgage may give the lender the right to accelerate payments, take possession and receive rents, and start foreclosure. Defaults may also come about by the failure to observe other conditions in the mortgage or deed of trust.

Occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid principal balance of the loan. Also called negative amortization. The danger of negative amortization is that the homebuyer ends up owing more than the original amount of the loan.

The amount by which the sales price of a note (or financial instrument) is below or less than its face value. The purpose of a discount is to adjust the yield upward either in lieu of interest or in addition to interest. Discount points are payable to the lender by the borrower or seller to increase the lender’s effective yield. One point is equal to 1% of the loan.

The deposit money given to the seller or his agent by the potential buyer upon the signing of the agreement of sale to show that he is serious about buying the house. If the sale goes through, the earnest money is applied against the down payment. If the sale does not go through, the earnest money will be forfeited or lost unless the binder or offer to purchase expressly provides that it is refundable.

The amount of money to be paid by the purchaser to the seller upon the signing of the agreement of sale. The agreement of sale will refer to the down payment amount and will acknowledge receipt of the down payment. Down payment is the difference between the sales price and maximum mortgage amount. The down payment may not be refundable if the purchaser fails to buy the property without good cause. If the purchaser wants the down payment to be refundable, he should insert a clause in the agreement of sale specifying the conditions under which the deposit will be refunded, if the agreement does not already contain such clause. If the seller cannot deliver good title, the agreement of sale usually requires the seller to return the down payment and to pay interest and expenses incurred by the purchaser.

The loss of value due to changes outside the particular property affected (e.g., high power lines, busy streets, proximity to an airport or any other structure perceived to be less than desirable); also called economic depreciation.

A legal right or interest in land that affects a good or clear title, and diminishes the land’s value. It can take numerous forms, such as zoning ordinances, easement rights, claims, mortgages, liens, charges, a pending legal action, unpaid taxes, or restrictive covenants. An encumbrance does not legally prevent transfer of the property to another. A title search is all that is usually done to reveal the existence of such encumbrances, and it is up to the buyer to determine whether he wants to purchase with the encumbrance, or what can be done to remove it.

Natural or man-made forces that may be hazardous to the health or safety of the homeowner. Examples include: hazardous wastes, toxic substances, radon gas and materials containing asbestos. These types of hazards can adversely affect the value and marketability of the property.

A federal law prohibiting lenders and other creditors from discriminating based on race, color, sex, religion, national origin, age, marital status, receipt of public assistance or because an applicant has exercised his or her rights under the Consumer Credit Protection Act.

The value of a homeowner’s unencumbered interest in Real Estate. Equity is computed by subtracting from the property’s fair market value the total of the unpaid mortgage balance and any outstanding liens or other debts against the property. A homeowner’s equity increases as he pays off his mortgage or as the property appreciates in value. When the mortgage and all other debts against the property are paid in full the homeowner has 100% equity in his property.

Funds paid by one party to another (the escrow agent) to hold until the occurrence of a specified event, after which the funds are released to a designated individual. In FHA mortgage transactions an escrow account usually refers to the funds a mortgagor pays the lender at the time of the periodic mortgage payments. The money is held in a trust fund, provided by the lender for the buyer. Such funds should be adequate to cover yearly-anticipated expenditures for Mortgage insurance premiums, taxes, hazard insurance premiums, and special assessments.

In certain regions, an escrow agent holds in escrow funds as well as documents to be signed by both buyer and seller. Once all conditions of the closing have been satisfied, the documents and the funds are distributed by the escrow agent to the interested parties.

A federal law which requires a lender who is rejecting a loan request because of adverse credit information to inform the borrower of the source of such information. This law also requires consumer-reporting agencies to exercise fairness, confidentiality and accuracy in preparing and disclosing credit information.

The price established in a free market between a buyer and seller in an arms-length transaction where neither one is compelled to buy or sell. In an appraisal, this is the final value derived after examining the Sales Comparison, Cost, and if applicable, Income approaches; sometimes referred to as “Market Value.”

The government agency that guarantees mortgages secured by residential properties located in rural areas, concentrating on borrowers with income less than HUD’s local median income for the area in which they reside. FmHa is now known as Rural Economic and Community Development.

A quasi-governmental, federally sponsored organization that acts as a secondary market investor to buy and sell mortgage loans. FHLMC sets many of the guidelines for conventional mortgage loans, as does FNMA.

An agency within the Department of Housing and Urban Development that sets standards for underwriting and insures residential Mortgage loans made by private lenders. One of FHA’s objectives is to ensure affordable mortgages to those with low or moderate income. FHA loans may be high loan-to-value, and they are limited by loan amount. FHA mortgage insurance requires a fee of up to 3.8 percent of the loan amount to be paid either at closing or added to each monthly payment, as well as an annual fee of 0.5 percent of the loan amount added to each monthly payment.

A private corporation that acts as a secondary market investor to buy and sell mortgage loans. FNMA sets many of the guidelines for conventional mortgage loans, as does FHLMC. The major purpose of this organization is to make mortgage money more affordable and more available.

The maximum form of ownership, with the right to occupy a property and sell it to a buyer at anytime. Upon the death of the owner, the property goes to the owner’s designed heirs. Also known as fee simple absolute.

A legal term applied to any of the various methods of enforcing payment of the debt secured by a mortgage , or deed of trust, by taking and selling the mortgaged property, and depriving the mortgagor of possession.

A deed which conveys not only all the grantor’s interests in and title to the property to the grantee, but also warrants that if the title is defective or has a “cloud” on it (such as mortgage claims, tax liens, title claims, judgments, or mechanic’s liens against it) the grantee may hold the grantor liable.

A Mortgage that has initial monthly payments set at an amount lower than that required for full amortization of the debt. The payments are then increased by a specified percentage each year during the graduated payment period. At the end of the period, payments are in an amount that will fully amortize the Mortgage.

A Real Estate loan, usually in a subordinate position, that allows a borrower to borrow against equity in Real Estate owned with specific limitations. This is an open-end loan that permits the borrower to repay and re-borrow the funds available.

A non-profit association, whose directors and officers are elected by the unit owners of a condominium or PUD project; primary responsibilities are to manage the common areas, expenses and services of the project.

The sum of all monthly housing Mortgage expenses such as principal, interest, taxes and insurance (PITI), Homeowners dues, private mortgage insurance and any special assessments as a percentage of gross qualifying income.

That portion of a borrower’s monthly payment held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as Reserves.

A published interest rate complied from other indicators such as U.S. Treasury bills or the monthly average interest rate on loans closed by savings and loan organizations. Mortgage lenders use the index figure to establish rates on adjustable rate mortgages (ARM’s).

A loan that is for a larger dollar amount than the limits set by the Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) guidelines. You can view more at http://zacharykarp.com/types-of-mortgages/.

The relationship, expressed as a percentage, between the amount of the proposed loan and a property’s appraised value or purchase price. For example, a $75,000 loan on a property appraised at $100,000 is a 75% loan-to-value.

The amount a lender adds to the index of an adjustable rate mortgage to establish an interest rate. For example, a margin of 1.50 added to a 7 percent index establishes an interest rate of 8.50 percent. The margin remains the same throughout the loan.

A title that is free and clear of objectionable liens, clouds, or other title defects. A title which enables an owner to sell his property freely to others and which others will accept without objection.

The most probable price which a ready, willing and able buyer would pay and a willing seller will accept, both being fully informed under no pressure to act. The market value may be different from the price a property can actually be sold for at a given time (market price).

MIP is one-half percent borrowers pay each month on FHA insured Mortgage loans. It is insurance from FHA to the lender against incurring a less due to the borrower’s default. On September 1, 1983 the MIP was changed to a one-time charge to borrowers.

A mortgage with a provision that permits borrowing additional money in the future without refinancing the loan or paying additional financing charges. Open-end provisions often limit such borrowing to no more than would raise the balance to the original loan figure.

The payment made by a borrower to the lender for transmittal to HUD to help defray the cost of the FHA mortgage insurance program and to provide a reserve fund to protect lenders
against loss in insured mortgage transactions. In FHA insured mortgages this represents an annual rate of one-half of one percent paid by the mortgagor on a monthly basis.

A written agreement to repay a loan. The agreement is secured by a mortgag , serves as proof of an indebtedness, and states the manner in which it shall be paid. The note states the actual amount of the debt that the mortgage secures and renders the mortgagor personally responsible for repayment.

A situation in which a borrower is paying less interest than what is actually being charged for a mortgage loan. The unpaid interest is added to the loan’s principal. The borrower may end up owing more than the original amount of the mortgage.

A loan that does not conform to Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) guidelines because the loan amount is too high or FNMA/FHLMC underwriting or other criteria are not met. Jumbo loans are non-conforming. Also called Sub-prime or BCD.

The ratio of the borrower¹s total housing payment (principal, interest, taxes insurance, HOA fees, special assessments, and subordinate financing) that is used to measure the borrower’s capacity to manage the housing expense: also known as “housing debt-to-income ratio.”

Items that generally must be paid for at the time of closing and are generally recurring charges. Prepaid items may include the following:
– First year premiums for hazard, flood, and Mortgage insurance, as applicable to the transaction,
– Prorated interest,
– Any special assessments which must be prepaid (i.e., water/sewer connection, etc.) and,
– Escrow accounts for any of the above.

Payment of mortgage loan, or part of it, before due date. Mortgage agreements often restrict the right of prepayment either by limiting the amount that can be prepaid in any one year or charging a penalty for prepayment. The Federal Housing Administration does not permit such restrictions in FHA insured mortgages.

Tentative establishment of a borrower¹s qualification for a mortgage loan amount of a specific amount or ability to make monthly payments at a certain level, based solely on debt-to-income ratios. Pre-qualification is an estimate only is subject to debt and income verification, credit history, property appraisal and other factors.

Lenders making mortgage loans directly to borrower’s such as savings and loan association, commercial banks and mortgage companies. These lenders sometimes sell their mortgages into the secondary mortgage markets such as FNMA of GNMA, etc.

A planned combination of diverse land uses, such as housing, recreation, and shopping in one contained development or subdivision. A major feature of a PUD includes areas of common land for use by the housing unit owners; the association of unit owners generally owns, pays fees, and maintains the common areas. Also see DiMinimus PUD.

A deed which transfers whatever interest the maker of the deed may have in the particular parcel of land. A quitclaim deed is often given to clear the title when the grantor’s interest in a property is questionable. By accepting such a deed the buyer assumes all the risks. Such a deed makes no warranties as to the title, but simply transfers to the buyer whatever interest the grantor has.

Sometimes referred to as “cash reserves” or “post closing reserves”; this is the amount of liquid assets the borrower has remaining after completion of the Mortgage loan transaction and payment of any other debt(s) that had to be satisfied in order for the borrower to qualify for the loan.

Abbreviation for the federal Real Estate Settlement Procedures Act, which requires lenders to disclose information on the nature and costs of the Real Estate settlement process, limits certain fees and charges, and regulates the amount home buyers are required to place in escrow.

A form of mortgage in which the lender makes periodic payments to the borrower using the borrower’s equity in the home as satisfaction of the mortgage (The document issued by the mortgagee when the mortgage loan is paid in full).

A debt that does not have a fixed payment, although repayment is usually a percentage of the outstanding balance and made at regular intervals; most common are credit cards issued by banks or department stores.

A second home/vacation home that is occupied by the borrower for some portion of the year for his/her exclusive use and enjoyment but which is suitable for year-round occupancy. It cannot be subject to a mandatory rental pool and the borrower does not intend to use the property for income purposes.

A market in which investors like GNMA, FHLMC, FNMA and private organizations buy large numbers of mortgages from the primary lenders and either hold them in a portfolio or package them for sale to others. By selling loan in secondary market, lenders obtain the funds needed to make new loans.

The responsibility of collecting monthly mortgage payments and properly crediting them to the principal, interest, taxes and insurance, as well as keeping the borrower informed of any changes in the status of the loan.

A lien that binds a specified piece of property, unlike a general lien, which is levied against all one’s assets. It creates a right to retain something of value belonging to another person as compensation for labor, material, or money expended in that person’s behalf. In some localities it is called “particular” lien or “specific” lien.

A deed in which the grantor conveys title to the grantee and agrees to protect the grantee against title defects or claims asserted by the grantor and those persons whose right to assert a claim against the title arose during the period the grantor held title to the property. In a special warranty deed the grantor guarantees to the grantee that he has done nothing during the time he held title to the property which has, or which might in the future, impair the grantee’s title.

As applied to Real Estate , an enforced charge imposed on persons, property or income, to be used to support the State. The governing body in turn utilizes the funds in the best interest of the general public.

A loan on which the interest rate has been “bought down” for a temporary period of time at the beginning of the loan by escrowing funds at the time of closing, which can be applied to the total monthly mortgage payment as each becomes due.

As generally used, the rights of ownership and possession of particular property. In Real Estate usage, title may refer to the instruments or documents by which a right of ownership is established (title documents), or it may refer to the ownership interest one has in the Real Estate.

Protects lenders or homeowners against loss of their interest in property due to legal defects in title. Title insurance may be issued to a “mortgagee’s title policy.” Insurance benefits will be paid only to the “named insured” in the title policy, so it is important that an owner purchase an “owner’s title policy”, if he desires the protection of title insurance.

A check of the title records, generally at the local courthouse, to make sure the buyer is purchasing a house from the legal owner and there are no liens, overdue special assessments, or other claims or outstanding restrictive covenants filed in the record, which would adversely affect the marketability or value of title.

A party who is given legal responsibility to hold property in the best interest of or “for the benefit of” another. The trustee is one placed in a position of responsibility for another, a responsibility enforceable in a court of law.

The federal agency responsible for the VA loan guarantee program as well as other services for eligible veterans. In general, qualified veterans can apply for home loans with no down payment and a mortgage insurance premium of 1 percent of the loan amount.

A junior mortgage taken back by the seller for the amount of the property’s purchase price less the buyer’s down payment. The existing loan is retained and combined with a new, larger loan and the interest rate is set somewhere between the old rate and the current market rate. A typical wraparound is an interest-only loan with a 5-year balloon or less.